Pakistan economy
Review and Recommendations
Pakistan ECONOMY: Key Stakeholders
perspective
CITIZENS
MULTILATERAL AGENCIES
(IMF/WORLD BANK etc.)
INVESTORS
Slide 2
THE CITIZENS PERSPECTIVE
THE CITIZENS PERSPECTIVE
Crushing Inflation
20.8%
Consumer Price Inflation %
14.6%
12.0%
9.3%
4.4%
3.5% 3.1%
7.9% 7.8%
Real GDP Growth Rate %
4.6%
8.6%
6.6% 6.8%
FY-2010
FY-2009
FY-2008
FY-2011*
* July-December
FY-2007
FY-2006
FY-2005
FY-2004
FY-2003
FY-2002
FY-2001
5.1%
3.9%
4.1%
3.7%
3.6%
2.5%
2.5%
Slide 4
* SBP projection
FY-2011*
FY-2010
FY-2009
FY-2008
FY-2007
FY-2005
FY-2004
FY-2003
FY-2002
Source: State Bank of Pakistan
FY-2001
1.2%
FY-2000
FY-2000
6.4%
FY-2006
3.6%
Lack of Employment Opportunities
11.7%
THE CITIZENS PERSPECTIVE (CONT…)
Lack of Economic Justice:

Rich don’t pay fair share of taxes

Government not able to control cartel’s
(mafias)

Poor and unequal access to services and
opportunities (gas, electricity, education, health
etc.)
Slide 5
THE MULTILATERAL PERSPECTIVE
THE MULTILATERAL PERSPECTIVE: DEBT
TRAP
(100)
5,000
60
4,500
50
4,000
3,500
30
3,000
0.0%
2,000
-1.0%
1,500
-2.0%
-3.2%
(500)
(600)
-4.0%
-3.7%
-4.3% -4.3%
-4.3% -4.4%
-5.0%
(700)
-5.3%
0
2007
Domestic Debt - Rs. Billion
2008
2009
2010
External Debt - USD Billion
As % of GDP
Rs. Billion
(400)
10
2006
(300)
-3.0%
20
2,500
(200)
-2.4%
40
External Debt - USD Billion
Domestic Debt - Rs. Billion
FY-2010
FY-2009
FY-2008
FY-2007
FY-2006
FY-2005
FY-2004
FY-2003
FY-2002
FY-2001
Domestic and External Debt
-6.0%
(800)
(900)
-7.0%
Fiscal Deficit
(1,000)
-7.6%
Fiscal Deficit - Rs. Billion
As % of GDP
-6.3% -8.0%
Slide 7
Source: State Bank of Pakistan
THE MULTILATERAL PERSPECTIVE: DEBT
TRAP
11
New External Debt - USD Billion
9
9
6
6
5
5
4
3
3
FY-2010
FY-2009
FY-2008
FY-2007
FY-2006
FY-2005
FY-2004
FY-2003
FY-2002
FY-2001
FY-2000
2
Caught in a debt trap and unable to survive without constant external support
Source: State Bank of Pakistan
Slide 8
THE MULTILATERAL PERSPECTIVE
Tax to GDP Ratio - Pakistan
9.2%
9.5%
9.2% 9.1% 9.2%
Tax to GDP Ratio Comparison with the Region
10.1%
9.7% 9.9% 9.8%
17.7%
17.0%
17.0%
15.5%
15.3%
Group's Average,
14.1%
14.4%
11.0%
10.1%
Under taxed and poorly documented economy
Source: State Bank of Pakistan
Slide 9
Bangladesh
Pakistan
Indonesia
Philippines
Srilanka
Malaysia
China
Thailand
India
FY-2010
FY-2009
FY-2008
FY-2007
FY-2006
FY-2005
FY-2004
FY-2003
FY-2002
8.5%
THE MULTILATERAL PERSPECTIVE
27%
Intraregional Trade as a share of GDP - %
16%
6%
5%
3%
1%
East Asia
Europe
Latin
America
Sub Saharan Middle East South Asia
Africa
Weak trade competitiveness:


Lowest regional trade integration in the world
Poorly educated, low skill workforce
Source: Promoting Economic Cooperation in South Asia, World Bank, 2010
Slide 10
THE MULTILATERAL PERSPECTIVE
Over and poorly regulated economy
Large, highly inefficient, cash draining public sector
Credit to Public Sector Enterprises - Rs. Billion
Privatization Proceeds - Rs. billion
153
97
72
85
28
Slide 11
(12)
(3)
(13)
FY-2010
Source: State Bank of Pakistan
(19)
FY-2009
FY-2009
FY-2008
FY-2008
FY-2007
FY-2007
FY-2006
FY-2006
8
FY-2005
FY-2005
1
FY-2004
FY-2004
2
FY-2003
FY-2003
11
FY-2002
11
33
20
The Investors Perspective
The Investors Perspective: Out of
control Public Spending
1,169
Private & Public Sector Borrowings
Heavy borrowing by the
government has resulted in classic
crowding out effect on borrowing ,
reducing private investments &
driving down private demand for
credit.
768
207
132
2005-2007
2008-2010
Private Sector Borrowing
Government Borrowing
Public & Private Sector Investment as % of GDP
6 Months T-Bill Rate
20.5%
13.7%
20.9%
17.3%
20.4%
12.5%
4.8%
5.5%
15%
5.4%
8.5%
4.6%
4.3%
2005-2007
2008-2010
Spot *
* Feb, 2011
Source: State Bank of Pakistan
15.7%
15.4%
15.0%
12.7%
10.7%
FY-2006
FY-2007
FY-2008
FY-2009
FY-2010
Public Sector Investment as % of GDP
Slide 13
Private Sector Investment as % of GDP
The Investors Perspective
Badly deteriorated credit standing
B+
B
B-
BPakistan's Credit Rating by Standard & Poor’s (S&P)
CCC+
B-
B-
B-
B
B
B+
B+
B+
B+
CCC+
B-
B-
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Bloomberg
Slide 14
THE SOLUTION
THE SOLUTION
On a war footing address the severe energy crisis by taking
critical reform decisions which tackle pricing distortions,
production and distribution inefficiencies, remove bottlenecks
for urgently needed imports and develop the indigenous
energy resources.
Take urgent & concrete steps to sharply reduce public finance
deficits.
•
•
•
•
Overhaul the tax & tariff structure and bring all sectors into a
uniform documented tax net.
Reform and restructure public sector enterprises, starting with the
transparent appointment of capable / professional top management
and boards which are empowered to take the necessary actions.
Eliminate waste in Govt. expenditure.
Phase out broad based non targeted subsidies which unnecessarily
benefit the well off also.
Significantly increase education, health and income support
expenditures (targeted subsidies) for the most vulnerable
segments of the Society.
Strengthen intra-regional trade linkages
Slide 16
ADDRESS THE SEVERE ENERGY CRISIS
Expedite LNG imports
Eliminate pricing distortions between different fuels /
sectors created by GoP taxation / pricing decisions.
Accelerate development of Thar Coal
Revamp obsolete power generation / distribution /
transmission facilities
Deregulate the sector to bring in innovation and allow
market to allocate molecules
Accelerate gas exploration through political initiatives
by settling high prospective zones in Baluchistan & KP
- offer high incentives, which are consistent with
global prices, for offshore drilling
Slide 17
IMPROVEMENT OF PUBLIC FINANCE:
OVERHAUL THE TAX STRUCTURE
Same rate of tax regardless of source of
income. Bring all exempted/severely
under taxed sectors in the tax net
Corporate Tax Rate
35%
33.99%
Lower the tax rate and remove all
exemptions.
30%
25%
25%
25%
25%
20%
Document the Economy
Revamp FBR. Deploy technology
Pakistan*
India
Thailand
China
Indonesia Malaysia Vietnam
* Exclusive of 7% levies (WWF, WPPF)
Turkey
Carry out strategic review of tariff
structure to create level playing field for
local manufacturing
Check abuse/misuse – Afghan Transit
Trade/ under invoicing / smuggling
Source: State Bank of Pakistan
Slide 18
IMPROVEMENT OF PUBLIC FINANCE:
REFORM, RESTRUCTURE AND DEREGULATE
Reform and restructure public sector enterprises
•
Create a "supra board" which overseas the restructuring
program of all these PSE's
•
Take these PSE's out of control of line ministries and have
the "supra board" report to a parliamentary committee for
restructuring.
•
Appoint capable/professional top management and boards
which are empowered and accountable.
•
Mandate to reform and restructure these PSE's within two
years.
Focused and integrated deregulation of key sectors like
energy and agricultural commodities
Strengthen regulatory agencies (CCP, OGRA, NEPRA,
SECP) by building capacity and ensuring independence.
Slide 19
IMPROVEMENT OF PUBLIC FINANCE:
ELIMINATION OF WASTE
Reduce size of Govt. structure by eliminating ministries
and subordinated institutions which add little or no value
Introduce stronger parliamentary oversight over Govt.
expenditure, including defense expenditure, by
strengthening parliamentary committees
Make Freedom of Information Act operational and provide
citizens access to Govt. expenditure, particularly by using
information technology
Slide 20
INCREASE EDUCATION, HEALTH AND INCOME
SUPPORT EXPENDITURE
Significantly enhance resources for education, health
and social protection
Instead of broad based subsidies use targeted income
support programs
Use innovative strategies to provide education and
health coverage
Enhance citizens engagement and oversight over
public education and health programs
Slide 21
REPRIORITIZING EXPENDITURE
PHASED OVER THREE YEARS
5% Improvement by
increasing Tax to GDP
Ratio by 5%
2% Improvement by
10% Reduction in
Expenditure
3.3% Reduction
in Fiscal Deficit
Total
Improvement:
9%
5.7% Increase
in Education,
Health and
Income Support
expenditure
2% Improvement by
elimination of PSEs
Losses
Slide 22
INTRA-REGIONAL TRADE LINKAGES
Revisit Afghan transit treaty to take care of Pakistani
business concerns and address trade opportunities
with Afghanistan and Central Asia
Increase trade linkages with Iran with specific
emphasis on energy
Work for creation of a fully integrated South/Central/
West Asia energy grid
Expand trade linkages with India
Slide 23